pfis_Current_Folio_10Q

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-Q

 


 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended March 31, 2016

or

Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the transition period from

001-36388

(Commission File Number)

 


 

PEOPLES FINANCIAL SERVICES CORP.

(Exact name of registrant as specified in its charter)

 


 

Pennsylvania

23-2391852

(State of

incorporation)

(IRS Employer

ID Number)

 

 

150 North Washington Avenue, Scranton, PA

18503

(Address of principal executive offices)

(Zip code)

 

(570) 346-7741

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or for such shorter period that the registrant was required to submit and post such files.    Yes      No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes      No   

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 7,396,404 at April 30, 2016.

 

 

 


 

Table of Contents

PEOPLES FINANCIAL SERVICES CORP.

FORM 10-Q

 

For the Quarter Ended March 31, 2016

 

 

 

 

 

 

 

Contents

 

 

 

Page No.

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION:

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2016 and December 31, 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Income and Comprehensive Income for the Three months ended March 31, 2016 and 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three months ended March 31, 2016 and 2015

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three months ended March 31, 2016 and 2015

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

37 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

37 

 

 

 

 

 

PART II 

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

38 

 

 

 

 

 

Item 1A. 

 

Risk Factors

 

38 

 

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38 

 

 

 

 

 

Item 3. 

 

Defaults upon Senior Securities

 

38 

 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

 

38 

 

 

 

 

 

Item 5. 

 

Other Information

 

38 

 

 

 

 

 

Item 6. 

 

Exhibits

 

39 

 

 

 

 

 

 

 

Signatures

 

40 

 

 

2


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

    

March 31, 2016

    

December 31, 2015

 

Assets:

 

 

 

 

 

 

 

Cash and due from banks

 

$

23,699

 

$

28,218

 

Interest-bearing deposits in other banks

 

 

299

 

 

4,699

 

Federal funds sold

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

 

264,175

 

 

284,935

 

Held-to-maturity: Fair value March 31, 2016, $12,322; December 31, 2015, $12,606     

 

 

11,681

 

 

12,109

 

Total investment securities

 

 

275,856

 

 

297,044

 

Loans held for sale

 

 

78

 

 

 

 

Loans, net

 

 

1,409,691

 

 

1,340,865

 

Less: allowance for loan losses

 

 

14,158

 

 

12,975

 

Net loans

 

 

1,395,533

 

 

1,327,890

 

Premises and equipment, net

 

 

29,386

 

 

28,157

 

Accrued interest receivable

 

 

5,455

 

 

5,796

 

Goodwill

 

 

63,370

 

 

63,370

 

Intangible assets

 

 

5,091

 

 

5,397

 

Other assets

 

 

63,603

 

 

58,487

 

Total assets

 

$

1,862,370

 

$

1,819,058

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

323,456

 

$

320,978

 

Interest-bearing

 

 

1,152,003

 

 

1,134,832

 

Total deposits

 

 

1,475,459

 

 

1,455,810

 

Short-term borrowings

 

 

60,350

 

 

38,325

 

Long-term debt

 

 

59,773

 

 

60,354

 

Accrued interest payable

 

 

506

 

 

560

 

Other liabilities

 

 

14,837

 

 

15,241

 

Total liabilities

 

 

1,610,925

 

 

1,570,290

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, par value $2.00, authorized 25,000,000 shares, issued 7,399,298 shares at March 31, 2016 and 7,410,606 shares at December 31, 2015

 

 

14,799

 

 

14,821

 

Capital surplus

 

 

134,994

 

 

135,371

 

Retained earnings

 

 

103,288

 

 

100,701

 

Accumulated other comprehensive loss

 

 

(1,636)

 

 

(2,125)

 

Total stockholders’ equity

 

 

251,445

 

 

248,768

 

Total liabilities and stockholders’ equity

 

$

1,862,370

 

$

1,819,058

 

 

See notes to consolidated financial statements

 

3


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

    

2016

    

2015

 

Interest income:

 

 

 

 

 

 

 

Interest and fees on loans:

 

 

 

 

 

 

 

Taxable

 

$

14,346

 

$

13,340

 

Tax-exempt

 

 

751

 

 

559

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

Taxable

 

 

687

 

 

900

 

Tax-exempt

 

 

875

 

 

805

 

Dividends

 

 

10

 

 

9

 

Interest on interest-bearing deposits in other banks

 

 

17

 

 

8

 

Interest on federal funds sold

 

 

 

 

 

7

 

Total interest income

 

 

16,686

 

 

15,628

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Interest on deposits

 

 

1,283

 

 

1,268

 

Interest on short-term borrowings

 

 

77

 

 

8

 

Interest on long-term debt

 

 

360

 

 

259

 

Total interest expense

 

 

1,720

 

 

1,535

 

Net interest income

 

 

14,966

 

 

14,093

 

Provision for loan losses

 

 

1,200

 

 

750

 

Net interest income after provision for loan losses

 

 

13,766

 

 

13,343

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Service charges, fees and commissions

 

 

1,444

 

 

1,612

 

Merchant services income

 

 

914

 

 

790

 

Commission and fees on fiduciary activities

 

 

482

 

 

459

 

Wealth management income

 

 

412

 

 

205

 

Mortgage banking income

 

 

204

 

 

222

 

Life insurance investment income

 

 

193

 

 

189

 

Net gain on sale of investment securities available-for-sale

 

 

242

 

 

832

 

Total noninterest income

 

 

3,891

 

 

4,309

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Salaries and employee benefits expense

 

 

5,332

 

 

5,233

 

Net occupancy and equipment expense

 

 

2,437

 

 

2,468

 

Merchant services expense

 

 

632

 

 

533

 

Amortization of intangible assets

 

 

305

 

 

305

 

Other expenses

 

 

2,912

 

 

2,555

 

Total noninterest expense

 

 

11,618

 

 

11,094

 

Income before income taxes

 

 

6,039

 

 

6,558

 

Income tax expense

 

 

1,157

 

 

1,514

 

Net income

 

 

4,882

 

 

5,044

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrealized gain on investment securities available-for-sale

 

 

995

 

 

767

 

Reclassification adjustment for net gain on sales included in net income

 

 

(242)

 

 

(832)

 

Other comprehensive income (loss)

 

 

753

 

 

(65)

 

Income tax expense (benefit) related to other comprehensive loss

 

 

264

 

 

(23)

 

Other comprehensive income (loss), net of income taxes

 

 

489

 

 

(42)

 

Comprehensive income

 

$

5,371

 

$

5,002

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

 

 

Basic

 

$

0.66

 

$

0.67

 

Diluted

 

$

0.66

 

$

0.67

 

Average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

7,403,510

 

 

7,548,358

 

Diluted

 

 

7,403,510

 

 

7,548,358

 

Dividends declared

 

$

0.31

 

$

0.31

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

 

4


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Common

 

Capital

 

Retained

 

Comprehensive

 

 

 

 

 

    

Stock  

    

Surplus  

    

Earnings  

    

Loss  

    

Total  

 

Balance, January 1, 2016

 

$

14,821

 

$

135,371

 

$

100,701

 

$

(2,125)

 

$

248,768

 

Stock based compensation

 

 

 

 

 

18

 

 

 

 

 

 

 

 

18

 

Net income

 

 

 

 

 

 

 

 

4,882

 

 

 

 

 

4,882

 

Other comprehensive income, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

489

 

 

489

 

Dividends declared: $0.31 per share

 

 

 

 

 

 

 

 

(2,295)

 

 

 

 

 

(2,295)

 

Shares retired: 11,308 shares

 

 

(22)

 

 

(395)

 

 

 

 

 

 

 

 

(417)

 

Balance, March 31, 2016

 

 

14,799

 

 

134,994

 

 

103,288

 

 

(1,636)

 

 

251,445

 

Balance, January 1, 2015

 

 

15,097

 

 

140,214

 

 

92,297

 

 

(829)

 

 

246,779

 

Stock based compensation

 

 

 

 

 

18

 

 

 

 

 

 

 

 

18

 

Net income

 

 

 

 

 

 

 

 

5,044

 

 

 

 

 

5,044

 

Other comprehensive loss, net of income taxes

 

 

 

 

 

 

 

 

 

 

 

(42)

 

 

(42)

 

Dividends declared: $0.31 per share

 

 

 

 

 

 

 

 

(2,341)

 

 

 

 

 

(2,341)

 

Balance, March 31, 2015

 

$

15,097

 

$

140,232

 

$

95,000

 

$

(871)

 

$

249,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

 

5


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

    

2016

    

2015

    

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

4,882

 

$

5,044

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation of premises and equipment

 

 

392

 

 

388

 

Amortization of deferred loan costs

 

 

169

 

 

132

 

Amortization of intangibles

 

 

305

 

 

305

 

Net accretion of purchase accounting adjustments on tangible assets

 

 

(275)

 

 

(292)

 

Amortization of loss on investment tax credits

 

 

125

 

 

151

 

Provision for loan losses

 

 

1,200

 

 

750

 

Net gain on sale of other real estate owned

 

 

(11)

 

 

(30)

 

Loans originated for sale

 

 

(5,268)

 

 

(5,300)

 

Proceeds from sale of loans originated for sale

 

 

5,394

 

 

5,907

 

Net gain on sale of loans originated for sale

 

 

(204)

 

 

(222)

 

Net amortization of investment securities

 

 

1,041

 

 

1,022

 

Net gain on sale of investment securities

 

 

(242)

 

 

(832)

 

Life insurance investment income

 

 

(193)

 

 

(189)

 

Deferred income tax expense (benefit)

 

 

 

 

 

(142)

 

Stock based compensation

 

 

18

 

 

18

 

Net change in:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

341

 

 

658

 

Other assets

 

 

(583)

 

 

559

 

Accrued interest payable

 

 

(54)

 

 

(114)

 

Other liabilities

 

 

(404)

 

 

(452)

 

Net cash provided by operating activities

 

 

6,633

 

 

7,361

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Proceeds from sales of investment securities available-for-sale

 

 

10,271

 

 

50,981

 

Proceeds from repayments of investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

 

10,453

 

 

9,835

 

Held-to-maturity

 

 

418

 

 

482

 

Purchases of investment securities:

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

(1,774)

 

Held-to-maturity

 

 

 

 

 

 

 

Net (purchase) redemption of restricted equity securities

 

 

(798)

 

 

1,555

 

Net increase in lending activities

 

 

(69,321)

 

 

(27,689)

 

Investment in low income housing investment tax credits

 

 

(2,050)

 

 

 

 

Purchases of premises and equipment

 

 

(1,646)

 

 

(1,097)

 

Purchase of investment in life insurance

 

 

(1,500)

 

 

 

 

Proceeds from sale of other real estate owned

 

 

83

 

 

338

 

Net cash (used in) provided by investing activities

 

 

(54,090)

 

 

32,631

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net increase (decrease) in deposits

 

 

19,798

 

 

(9,081)

 

Repayment of long-term debt

 

 

(573)

 

 

(808)

 

Net increase (decrease) in short-term borrowings

 

 

22,025

 

 

(19,557)

 

Retirement of common stock

 

 

(417)

 

 

 

 

Cash dividends paid

 

 

(2,295)

 

 

(2,341)

 

Net cash provided by financing activities

 

 

38,538

 

 

(31,787)

 

Net increase (decrease) in cash and cash equivalents

 

 

(8,919)

 

 

8,205

 

Cash and cash equivalents at beginning of year

 

 

32,917

 

 

31,426

 

Cash and cash equivalents at end of year

 

$

23,998

 

$

39,631

 

6


 

Table of Contents

Peoples Financial Services Corp.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

    

2016

    

2015

    

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

1,931

 

$

1,649

 

Income taxes

 

 

 

 

 

 

 

Noncash items:

 

 

 

 

 

 

 

Transfers of loans to other real estate

 

$

524

 

$

71

 

 

 

 

 

 

 

 

 

Acquisition:

 

 

 

 

 

 

 

Fair value of assets acquired:

 

 

 

 

 

 

 

Loans, net

 

$

143

 

$

104

 

Premises and equipment

 

 

(25)

 

 

(25)

 

Core deposit and other intangible assets

 

 

(267)

 

 

(304)

 

 

 

$

(149)

 

$

(225)

 

 

 

 

 

 

 

 

 

Fair value of liabilities assumed:

 

 

 

 

 

 

 

Deposits

 

$

149

 

$

199

 

Long-term debt

 

 

8

 

 

14

 

 

 

$

157

 

$

213

 

 

See notes to consolidated financial statements

 

7


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

1. Summary of significant accounting policies:

 

Nature of operations:

 

Peoples Financial Services Corp., a bank holding company incorporated under the laws of Pennsylvania, provides a full range of financial services through its wholly-owned subsidiary, Peoples Security Bank and Trust Company (“Peoples Bank”), including its subsidiary, Peoples Advisors, LLC (collectively, the “Company” or “Peoples”). The Company services its retail and commercial customers through twenty-four full-service community banking offices located within the Bucks, Lackawanna, Lehigh, Luzerne, Monroe, Montgomery, Susquehanna, Wayne and Wyoming Counties of Pennsylvania and Broome County of New York.

 

Basis of presentation:

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP’) for interim financial information and with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. All significant intercompany balances and transactions have been eliminated in consolidation. Prior-period amounts are reclassified when necessary to conform to the current year’s presentation. These reclassifications did not have any effect on the operating results or financial position of the Company. The operating results and financial position of the Company for the three months ended and as of March 31, 2016, are not necessarily indicative of the results of operations and financial position that may be expected in the future.

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates that are particularly susceptible to material change in the near term relate to the determination of the allowance for loan losses, fair value of financial instruments, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, the valuation of deferred tax assets, determination of other-than-temporary impairment losses on securities, impairment of goodwill and fair value of assets acquired and liabilities assumed in business combinations. Actual results could differ from those estimates. For additional information and disclosures required under GAAP, reference is made to the Company’s Annual Report on Form 10-K for the period ended December 31, 2015.

 

Recent accounting standards:

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-03, “Intangibles—Goodwill and Other, Business Combinations, Consolidation, Derivatives and Hedging: Effective Date and Transition Guidance. The mandate removes the effective dates from the private company accounting alternatives for goodwill, intangible assets, consolidation, and derivatives and hedging. This allows private companies to elect the accounting alternatives at any time without a preferability assessment. However, any subsequent change to an accounting policy election would require justification that the change is preferable under Topic 250. The ASU also extends certain favorable transition provisions of the accounting alternatives.  The amendments became effective immediately upon issuance of the ASU.  The adoption of this ASU has not had a significant impact on the Company’s financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-04, “Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products” The standard amends exempting gift cards and other prepaid stored-value products from the guidance on extinguishing financial liabilities. Rather, they will be subject to breakage accounting consistent with the new revenue guidance in Topic 606. However, the exemption only applies to breakage liabilities that are not subject to unclaimed property laws or that are attached to segregated bank accounts (e.g., consumer debit cards).  In this context, if an entity expects to be entitled to breakage, it should derecognize the amount of the liability in proportion to the pattern of rights expected to be exercised by the product holder. In addition, breakage should only be recognized to

8


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. The amendments also require entities to update their estimates of breakage at the end of each reporting period, with changes accounted for as a change in accounting estimate.  If an entity does not expect to be entitled to breakage, the entity should derecognize such liabilities within the scope of the ASU when the likelihood of the product holder exercising its remaining rights becomes remote.  The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments are effective for all other entities for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships,” which requires an entity to discontinue a designated hedging relationship in certain circumstances, including termination of the derivative hedging instrument or if the entity wishes to change any of the critical terms of the hedging relationship. The mandate clarifies that novation of a derivative (replacing one of the parties to a derivative instrument with a new party) designated as the hedging instrument would not, in and of itself, be considered a termination of the derivative instrument or a change in critical terms requiring discontinuation of the designated hedging relationship.  The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted.  The Company does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments”.  The guidance in this ASU addresses how an entity should assess whether contingent call (put) options that can accelerate the payment of debt instruments are clearly and closely related to their debt hosts. This assessment is necessary to determine if the option(s) must be separately accounted for as a derivative. The ASU clarifies that an entity is required to assess the embedded call (put) options solely in accordance with a specific four-step decision sequence. This means entities are not also required to assess whether the contingency for exercising the option(s) is indexed to interest rates or credit risk. For example, when evaluating debt instruments puttable upon a change in control, the event triggering the change in control is not relevant to the assessment. Only the resulting settlement of debt is subject to the four-step decision sequence.  The amendments are effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. However, if an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of that fiscal year. The Company does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-07, “Investments—Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting.”  This mandate requires an investor to initially apply the equity method of accounting from the date it qualifies for that method, for example, the date the investor obtains significant influence over the operating and financial policies of an investee. The ASU eliminates the previous requirement to retroactively adjust the investment and record a cumulative catch up for the periods that the investment had been held, but did not qualify for the equity method of accounting.  The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the application of the equity method. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-08  “Revenue from Contracts with Customers:  Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” This amendment updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. The updates to the principal versus agent guidance: (1) require an entity to determine whether it is a principal or an agent for each distinct good or service (or a distinct bundle of goods or services) to be provided to the customer; (2) illustrate how

9


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

an entity that is a principal might apply the control principle to goods, services, or rights to services, when another party is involved in providing goods or services to a customer; (3) clarify that the purpose of certain specific control indicators is to support or assist in the assessment of whether an entity controls a good or service before it is transferred to the customer, provide more specific guidance on how the indicators should be considered, and clarify that their relevance will vary depending on the facts and circumstances; and (4) revise existing examples and add two new ones to more clearly depict how the guidance should be applied.  The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements of Topic 606.  The Company does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting.”  The new standard introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows.  In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity.  The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur.  Further, the ASU provides two accounting alternatives to nonpublic entities:  A nonpublic entity can make an accounting policy election to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that meet certain conditions and a nonpublic entity can make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value.  The amendments are effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted.  The Company does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.

 

2. Other comprehensive income (loss):

 

The components of other comprehensive loss and their related tax effects are reported in the Consolidated Statements of Income and Comprehensive Income. The accumulated other comprehensive loss included in the Consolidated Balance Sheets relates to net unrealized gains and losses on investment securities available-for-sale and benefit plan adjustments.

 

The components of accumulated other comprehensive loss included in stockholders’ equity at March 31, 2016 and December 31, 2015 is as follows:

 

 

 

 

 

 

 

 

 

 

    

 

March 31, 2016

    

 

December 31, 2015

 

Net unrealized gain on investment securities available-for-sale

 

$

5,346

 

$

4,593

 

Income tax expense

 

 

1,871

 

 

1,607

 

Net of income taxes

 

 

3,475

 

 

2,986

 

Benefit plan adjustments

 

 

(7,863)

 

 

(7,863)

 

Income tax benefit

 

 

(2,752)

 

 

(2,752)

 

Net of income taxes

 

 

(5,111)

 

 

(5,111)

 

Accumulated other comprehensive loss

 

$

(1,636)

 

$

(2,125)

 

 

10


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Other comprehensive income (loss) and related tax effects for the three months ended March 31, 2016 and 2015 is as follows:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

    

2016

    

2015

 

Unrealized gain on investment securities available-for-sale

 

$

995

 

$

767

 

Net gain on the sale of investment securities available-for-sale(1)

 

 

(242)

 

 

(832)

 

Other comprehensive income (loss) gain before taxes

 

 

753

 

 

(65)

 

Income tax expense (benefit)

 

 

264

 

 

(23)

 

Other comprehensive income (loss)

 

$

489

 

$

(42)

 

(1)Represents amounts reclassified out of accumulated comprehensive loss and included in gains on sale of investment securities on the consolidated statements of income and comprehensive income.

3. Earnings per share:

 

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.

 

There were no shares considered anti-dilutive for the three month periods ended March 31, 2016 and 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

Three Months Ended March 31 

 

Basic  

 

Diluted  

 

Basic  

 

Diluted  

 

Net Income

    

$

4,882

    

$

4,882

    

$

5,044

    

$

5,044

    

Average common shares outstanding

 

 

7,403,510

 

 

7,403,510

 

 

7,548,358

 

 

7,548,358

 

Earnings per share

 

$

0.66

 

$

0.66

 

$

0.67

 

$

0.67

 

 

 

4. Investment securities:

 

The amortized cost and fair value of investment securities aggregated by investment category at March 31, 2016 and December 31, 2015 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

March 31, 2016

    

Cost  

    

Gains  

    

Losses  

    

Value  

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

$

64,562

 

$

499

 

$

7

 

$

65,054

 

State and municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

14,801

 

 

993

 

 

11

 

 

15,783

 

Tax-exempt

 

 

120,232

 

 

3,815

 

 

33

 

 

124,014

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

29,156

 

 

97

 

 

45

 

 

29,208

 

U.S. Government-sponsored enterprises

 

 

30,078

 

 

145

 

 

107

 

 

30,116

 

Total

 

$

258,829

 

$

5,549

 

$

203

 

$

264,175

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt state and municipals

 

$

6,864

 

$

333

 

$

1

 

$

7,196

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

81

 

 

1

 

 

 

 

 

82

 

U.S. Government-sponsored enterprises

 

 

4,736

 

 

308

 

 

 

 

 

5,044

 

Total

 

$

11,681

 

$

642

 

$

1

 

$

12,322

 

 

11


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

December 31, 2015

    

Cost  

    

Gains  

    

Losses  

    

Value  

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

10,030

 

 

 

 

$

31

 

$

9,999

 

U.S. Government-sponsored enterprises

 

 

68,831

 

$

291

 

 

62

 

 

69,060

 

State and municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

15,842

 

 

735

 

 

32

 

 

16,545

 

Tax-exempt

 

 

121,099

 

 

3,915

 

 

90

 

 

124,924

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

31,612

 

 

73

 

 

117

 

 

31,568

 

U.S. Government-sponsored enterprises

 

 

32,928

 

 

119

 

 

208

 

 

32,839

 

Total

 

$

280,342

 

$

5,133

 

$

540

 

$

284,935

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax-exempt state and municipals

 

$

6,865

 

$

186

 

$

16

 

$

7,035

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

84

 

 

1

 

 

 

 

 

85

 

U.S. Government-sponsored enterprises

 

 

5,160

 

 

326

 

 

 

 

 

5,486

 

Total

 

 

12,109

 

$

513

 

$

16

 

$

12,606

 

 

The maturity distribution of the fair value, which is the net carrying amount, of the debt securities classified as available-for-sale at March 31, 2016, is summarized as follows:

 

 

 

 

 

 

 

 

Fair

 

March 31, 2016

    

Value 

 

Within one year

 

$

26,168

 

After one but within five years

 

 

91,064

 

After five but within ten years

 

 

49,258

 

After ten years

 

 

38,361

 

 

 

 

204,851

 

Mortgage-backed securities

 

 

59,324

 

Total

 

$

264,175

 

 

 The maturity distribution of the amortized cost and fair value, of debt securities classified as held-to-maturity at March 31, 2016, is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Fair

 

March 31, 2016

    

Cost 

    

Value  

 

Within one year

 

 

 

 

 

 

 

After one but within five years

 

 

 

 

 

 

 

After five but within ten years

 

 

 

 

 

 

 

After ten years

 

$

6,864

 

$

7,196

 

 

 

 

6,864

 

 

7,196

 

Mortgage-backed securities

 

 

4,817

 

 

5,126

 

Total

 

$

11,681

 

$

12,322

 

 

Securities with a carrying value of $163,514 and $180,478 at March 31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and repurchase agreements as required or permitted by law.

 

12


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Securities and short-term investment activities are conducted with a diverse group of government entities, corporations and state and local municipalities. The counterparty’s creditworthiness and type of collateral is evaluated on a case-by-case basis. At March 31, 2016 and December 31, 2015, there were no significant concentrations of credit risk from any one issuer, with the exception of U.S. Government agencies and sponsored enterprises that exceeded 10.0 percent of stockholders’ equity.

 

The fair value and gross unrealized losses of investment securities with unrealized losses for which an other-than-temporary impairment (“OTTI”) has not been recognized at March 31, 2016 and December 31, 2015, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months 

 

12 Months or More 

 

Total 

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

March 31, 2016

    

Value 

    

Losses 

    

Value 

    

Losses 

    

Value 

    

Losses 

 

U.S. Government-sponsored enterprises

 

$

10,987

 

$

7

 

 

 

 

 

 

 

$

10,987

 

$

7

 

State and municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

 

 

 

 

 

$

551

 

$

11

 

 

551

 

 

11

 

Tax-exempt

 

 

14,675

 

 

29

 

 

1,366

 

 

5

 

 

16,041

 

 

34

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

5,435

 

 

11

 

 

5,164

 

 

34

 

 

10,599

 

 

45

 

U.S. Government-sponsored enterprises

 

 

13,479

 

 

27

 

 

2,902

 

 

80

 

 

16,381

 

 

107

 

Total

 

$

44,576

 

$

74

 

$

9,983

 

$

130

 

$

54,559

 

$

204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months  

 

12 Months or More  

 

Total  

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

December 31, 2015

    

Value 

    

Losses  

    

Value 

    

Losses  

    

Value  

    

Losses 

 

U.S. Treasury securities

    

$  

9,999

    

$

31

    

 

 

    

 

 

    

$

9,999

    

$

31

 

U.S. Government-sponsored enterprises

 

 

34,159

 

 

62

 

 

 

 

 

 

 

 

34,159

 

 

62

 

State and municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

 

 

 

 

 

$

532

 

$

32

 

 

532

 

 

32

 

Tax-exempt

 

 

21,341

 

 

87

 

 

1,952

 

 

19

 

 

23,293

 

 

106

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

15,114

 

 

56

 

 

5,477

 

 

61

 

 

20,591

 

 

117

 

U.S. Government-sponsored enterprises

 

 

17,647

 

 

104

 

 

6,030

 

 

104

 

 

23,677

 

 

208

 

Total

 

$

98,260

 

$

340

 

$

13,991

 

$

216

 

$

112,251

 

$

556

 

 

The Company had 60 investment securities, consisting of 31 tax-exempt state and municipal obligations, one taxable state and municipal obligation, three U.S. Government-sponsored enterprise securities, and 25 mortgage-backed securities that were in unrealized loss positions at March 31, 2016. Of these securities, one taxable state and municipal obligation, six mortgage-backed securities and three tax-exempt state and municipal securities were in a continuous unrealized loss position for twelve months or more. Management does not consider the unrealized losses on the debt securities, as a result of changes in interest rates, to be OTTI based on historical evidence that indicates the cost of these securities is recoverable within a reasonable period of time in relation to normal cyclical changes in the market rates of interest. Moreover, because there has been no material change in the credit quality of the issuers or other events or circumstances that may cause a significant adverse impact on the fair value of these securities, and management does not intend to sell these securities and it is unlikely that the Company will be required to sell these securities before recovery of their amortized cost basis, which may be maturity, the Company does not consider the unrealized losses to be OTTI at March 31, 2016. There was no OTTI recognized for the three months ended March 31, 2016 and 2015.

The Company had 88 investment securities, consisting of 38 tax-exempt state and municipal obligations, one taxable state and municipal obligation, one U.S. Treasury security, 12 U.S. Government-sponsored enterprise securities and 36 mortgage-backed securities that were in unrealized loss positions at December 31, 2015. Of these securities, seven

13


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

mortgage-backed securities, four tax-exempt state and municipal securities, and one taxable state and municipal obligation were in a continuous unrealized loss position for twelve months or more.

5. Loans, net and allowance for loan losses:

 

The major classifications of loans outstanding, net of deferred loan origination fees and costs at March 31, 2016 and December 31, 2015 are summarized as follows. Net deferred loan costs were $757 and $690 at March 31, 2016 and December 31, 2015.

 

 

 

 

 

 

 

 

 

 

    

 

March 31, 2016

    

 

December 31, 2015

 

Commercial

 

$

395,407

 

$

365,767

 

Real estate:

 

 

 

 

 

 

 

Commercial

 

 

598,875

 

 

567,277

 

Residential

 

 

301,686

 

 

306,218

 

Consumer

 

 

113,723

 

 

101,603

 

Total

 

$

1,409,691

 

$

1,340,865

 

 

The changes in the allowance for loan losses account by major classification of loan for the three months ended March 31, 2016 and 2015 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

Real estate

 

 

 

 

 

 

 

 

 

 

March 31, 2016

    

Commercial

    

Commercial

    

Residential

    

Consumer

    

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

   

$

3,042

 

$

4,245

 

$

4,082

 

$

1,583

 

$

23

 

$

12,975

 

Charge-offs

   

 

(3)

 

 

(55)

 

 

 

 

 

(65)

 

 

 

 

 

(123)

 

Recoveries

   

 

 2

 

 

16

 

 

25

 

 

63

 

 

 

 

 

106

 

Provisions

   

 

281

 

 

410

 

 

252

 

 

65

 

 

192

 

 

1,200

 

Ending balance

   

$

3,322

 

$

4,616

 

$

4,359

 

$

1,646

 

$

215

 

$

14,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate

 

    

 

 

 

 

 

 

 

 

March 31, 2015

    

Commercial

    

Commercial

    

Residential

    

Consumer

    

Unallocated

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

   

$

2,321

 

$

3,037

 

$

3,690

 

$

1,290

 

$

 

 

$

10,338

 

Charge-offs

   

 

(37)

 

 

(49)

 

 

(199)

 

 

(80)

 

 

 

 

 

(365)

 

Recoveries

   

 

61

 

 

1

 

 

5

 

 

13

 

 

 

 

 

80

 

Provisions

   

 

75

 

 

98

 

 

413

 

 

164

 

 

 

 

 

750

 

Ending balance

   

$

2,420

 

$

3,087

 

$

3,909

 

$

1,387

 

$

 

 

$

10,803

 

 

 

 

14


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

The allocation of the allowance for loan losses and the related loans by major classifications of loans at March 31, 2016 and December 31, 2015 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Real estate

 

 

 

 

 

 

 

 

 

 

March 31, 2016

    

Commercial

    

Commercial

    

   Residential

    

Consumer

    

Unallocated

    

   Total

 

Allowance for loan losses:

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

3,322

 

$

4,616

  

$

4,359

 

$

1,646

 

$

215

 

$

14,158

  

Ending balance: individually evaluated for impairment

 

 

1,040

 

 

434

 

 

533

 

 

89

 

 

 

 

 

2,096

  

Ending balance: collectively evaluated for impairment

 

 

2,282

 

 

4,075

 

 

3,826

 

 

1,557

 

 

215

 

 

11,955

  

Ending balance: loans acquired with deteriorated credit quality

 

$

 

 

$

107

  

$

 

 

$

 

 

$

 

 

$

107

  

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

395,407

 

$

598,875

  

$

301,686

 

$

113,723

 

$

 

 

$

1,409,691

  

Ending balance: individually evaluated for impairment

 

 

1,399

 

 

4,827

 

 

3,162

 

 

178

 

 

 

 

 

9,566

  

Ending balance: collectively evaluated for impairment

 

 

393,093

 

 

592,685

 

 

298,478

 

 

113,545

 

 

 

 

 

1,397,801

  

Ending balance: loans acquired with deteriorated credit quality

 

$

915

 

$

1,363

 

$

46

 

$

 

 

$

 

 

$

2,324

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Real estate

 

 

 

 

 

 

 

 

 

 

December 31, 2015

    

Commercial

    

Commercial

    

   Residential

    

Consumer

    

Unallocated

    

   Total

 

Allowance for loan losses:

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

3,042

 

$

4,245

  

$

4,082

 

$

1,583

 

$

23 

 

$

12,975

  

Ending balance: individually evaluated for impairment

 

 

759

 

 

126

  

 

1,138

 

 

117

 

 

 

 

 

2,140

  

Ending balance: collectively evaluated for impairment

 

 

2,283

 

 

4,012

  

 

2,944

 

 

1,466

 

 

23 

 

 

10,728

  

Ending balance: loans acquired with deteriorated credit quality

 

$

 

 

$

107

  

$

 

 

$

 

 

$

 

 

$

107

  

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

365,767

 

$

567,277

  

$

306,218

 

$

101,603

 

$

 

 

$

1,340,865

  

Ending balance: individually evaluated for impairment

 

 

1,196

 

 

4,006

  

 

4,917

 

 

148

 

 

 

 

 

10,267

  

Ending balance: collectively evaluated for impairment

 

 

363,620

 

 

561,903

  

 

301,252

 

 

101,455

 

 

 

 

 

1,328,230

  

Ending balance: loans acquired with deteriorated credit quality

 

$

951

 

$

1,368

  

$

49

 

$

 

 

$

 

 

$

2,368

  

 

 

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

 

·

Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention.

 

·

Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan

15


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

 

·

Substandard- A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

 

·

Doubtful – A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

·

Loss- A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loan is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

 

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at March 31, 2016 and December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

March 31, 2016

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

 

Commercial

 

$

388,364

 

$

3,564

 

$

3,479

 

$

 

 

$

395,407

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

559,346

 

 

20,401

 

 

19,128

 

 

 

 

 

598,875

 

Residential

 

 

293,467

 

 

1,775

 

 

6,444

 

 

 

 

 

301,686

 

Consumer

 

 

113,577

 

 

 

 

 

146

 

 

 

 

 

113,723

 

Total

 

$

1,354,754

 

$

25,740

 

$

29,197

 

$

 

 

$

1,409,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

 

December 31, 2015

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

 

Commercial

 

$

357,894

 

$

3,566

 

$

4,307

 

$

 

 

$

365,767

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

538,130

 

 

10,150

 

 

18,997

 

 

 

 

 

567,277

 

Residential

 

 

296,587

 

 

983

 

 

8,648

 

 

 

 

 

306,218

 

Consumer

 

 

101,486

 

 

 

 

 

117

 

 

 

 

 

101,603

 

Total

 

$

1,294,097

 

$

14,699

 

$

32,069

 

$

 

 

$

1,340,865

 

 

Information concerning nonaccrual loans by major loan classification at March 31, 2016 and December 31, 2015 is summarized as follows:

 

 

 

 

 

 

 

 

 

 

    

 

March 31, 2016

    

 

December 31, 2015

 

Commercial

 

$

1,813

 

$

1,632

 

Real estate:

 

 

 

 

 

 

 

Commercial

 

 

4,683

 

 

3,859

 

Residential

 

 

2,977

 

 

4,732

 

Consumer

 

 

178

 

 

148

 

Total

 

$

9,651

 

$

10,371

 

 

16


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

The major classifications of loans by past due status are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Greater

    

 

 

    

 

 

    

 

 

    

Loans > 90

 

 

 

30-59 Days

 

60-89 Days

 

than 90

 

Total Past

 

 

 

 

 

 

 

Days and

 

March 31, 2016

 

Past Due  

 

Past Due  

 

Days  

 

Due  

 

Current  

 

Total Loans  

 

Accruing  

 

Commercial

 

$

383

 

$

56

 

$

1,813

 

$

2,252

 

$

393,155

 

$

395,407

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,837

 

 

381

 

 

4,683

 

 

7,901

 

 

590,974

 

 

598,875

 

 

 

 

Residential

 

 

5,472

 

 

191

 

 

3,680

 

 

9,343

 

 

292,343

 

 

301,686

 

$

703

 

Consumer

 

 

921

 

 

234

 

 

452

 

 

1,607

 

 

112,116

 

 

113,723

 

 

274

 

Total

 

$

9,613

 

$

862

 

$

10,628

 

$

21,103

 

$

1,388,588

 

$

1,409,691

 

$

977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Greater

    

 

 

    

 

 

    

 

 

    

Loans > 90

 

 

 

30-59 Days

 

60-89 Days

 

than 90

 

Total Past

 

 

 

 

 

 

 

Days and

 

December 31, 2015

 

Past Due  

 

Past Due  

 

Days  

 

Due  

 

Current  

 

Total Loans  

 

Accruing  

 

Commercial

 

$

126

 

$

 

 

$

1,632

 

$

1,758

 

$

364,009

 

$

365,767

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,364

 

 

165

 

 

3,859

 

 

5,388

 

 

561,889

 

 

567,277

 

 

 

 

Residential

 

 

3,891

 

 

1,067

 

 

5,257

 

 

10,215

 

 

296,003

 

 

306,218

 

$

525

 

Consumer

 

 

705

 

 

353

 

 

386

 

 

1,444

 

 

100,159

 

 

101,603

 

 

238

 

Total

 

$

6,086

 

$

1,585

 

$

11,134

 

$

18,805

 

$

1,322,060

 

$

1,340,865

 

$

763

 

 

The following tables summarize information concerning impaired loans as of and for the three months ended March 31, 2016 and March 31, 2015, and as of and for the year ended, December 31, 2015 by major loan classification:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

March 31, 2016

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

With no related allowance:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

 

$

1,173

 

$

2,383

 

 

 

 

$

1,263

 

$

17

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,162

 

 

3,832

 

 

 

 

 

2,947

 

 

32

 

Residential

 

 

2,216

 

 

2,399

 

 

 

 

 

2,632

 

 

1

 

Consumer

 

 

89

 

 

89

 

 

 

 

 

60

 

 

 

 

Total

 

 

6,640

 

 

8,703

 

 

 

 

 

6,902

 

 

50

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,141

 

 

1,141

 

$

1,040

 

 

968

 

 

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,028

 

 

3,028

 

 

541

 

 

2,836

 

 

 

 

Residential

 

 

992

 

 

992

 

 

533

 

 

1,455

 

 

2

 

Consumer

 

 

89

 

 

89

 

 

89

 

 

103

 

 

 

 

Total

 

 

5,250

 

 

5,250

 

 

2,203

 

 

5,362

 

 

2

 

Commercial

 

 

2,314

 

 

3,524

 

 

1,040

 

 

2,231

 

 

17

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

6,190

 

 

6,860

 

 

541

 

 

5,783

 

 

32

 

Residential

 

 

3,208

 

 

3,391

 

 

533

 

 

4,087

 

 

3

 

Consumer

 

 

178

 

 

178

 

 

89

 

 

163

 

 

 

 

Total

 

$

11,890

 

$

13,953

 

$

2,203

 

$

12,264

 

$

52

 

 

 

17


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended  

 

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

December 31, 2015

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

With no related allowance:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

 

$

1,352

 

$

2,720

 

 

 

 

$

1,848

 

$

87

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,731

 

 

3,408

 

 

 

 

 

2,394

 

 

95

 

Residential

 

 

3,048

 

 

3,231

 

 

 

 

 

2,664

 

 

4

 

Consumer

 

 

31

 

 

31

 

 

 

 

 

17

 

 

 

 

Total

 

 

7,162

 

 

9,390

 

 

 

 

 

6,923

 

 

186

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

795

 

 

795

 

$

759

 

 

1,680

 

 

40

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,643

 

 

2,643

 

 

233

 

 

4,155

 

 

86

 

Residential

 

 

1,918

 

 

1,918

 

 

1,138

 

 

1,776

 

 

30

 

Consumer

 

 

117

 

 

117

 

 

117

 

 

126

 

 

 

 

Total

 

 

5,473

 

 

5,473

 

 

2,247

 

 

7,737

 

 

156

 

Commercial

 

 

2,147

 

 

3,515

 

 

759

 

 

3,528

 

 

127

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

5,374

 

 

6,051

 

 

233

 

 

6,549

 

 

181

 

Residential

 

 

4,966

 

 

5,149

 

 

1,138

 

 

4,440

 

 

34

 

Consumer

 

 

148

 

 

148

 

 

117

 

 

143

 

 

 

 

Total

 

$

12,635

 

$

14,863

 

$

2,247

 

$

14,660

 

$

342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Quarter Ended

 

 

 

 

 

 

Unpaid

 

 

 

 

Average

 

Interest

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

Income

 

March 31, 2015

    

Investment  

    

Balance  

    

Allowance  

    

Investment  

    

Recognized  

 

With no related allowance:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

 

$

2,319

 

$

3,900

 

 

 

 

$

2,349

 

$

20

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

2,198

 

 

2,936

 

 

 

 

 

2,565

 

 

19

 

Residential

 

 

2,272

 

 

2,456

 

 

 

 

 

2,472

 

 

1

 

Consumer

 

 

11

 

 

11

 

 

 

 

 

47

 

 

 

 

Total

 

 

6,800

 

 

9,303

 

 

 

 

 

7,433

 

 

40

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,625

 

 

1,625

 

$

1,466

 

 

1,597

 

$

14

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

3,939

 

 

3,939

 

 

732

 

 

3,732

 

 

17

 

Residential

 

 

1,639

 

 

1,639

 

 

843

 

 

1,513

 

 

10

 

Consumer

 

 

90

 

 

90

 

 

90

 

 

67

 

 

 

 

Total

 

 

7,293

 

 

7,293

 

 

3,131

 

 

6,909

 

 

41

 

Commercial

 

 

3,944

 

 

5,525

 

 

1,466

 

 

3,946

 

 

34

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

6,137

 

 

6,875

 

 

732

 

 

6,297

 

 

36

 

Residential

 

 

3,911

 

 

4,095

 

 

843

 

 

3,985

 

 

11

 

Consumer

 

 

101

 

 

101

 

 

90

 

 

114

 

 

 

 

Total

 

$

14,093

 

$

16,596

 

$

3,131

 

$

14,342

 

$

81

 

 

 Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $2,834 at March 31, 2016, $2,861 at December 31, 2015 and $2,967 at March 31, 2015.

18


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

 

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered generally fall within the following categories:

 

·

Rate Modification - A modification in which the interest rate is changed to a below market rate.

 

·

Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

 

·

Interest Only Modification - A modification in which the loan is converted to interest only payments for a period of time.

 

·

Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

 

·

Combination Modification - Any other type of modification, including the use of multiple categories above.

 

There was one loan modified as a troubled debt restructuring for the three months ended March 31, 2016, in the amount of $75.  There were four loans modified as troubled debt restructurings for the three months ended March 31, 2015, in the amount of $384. During the three months ended March 31, 2016, there were two payment defaults on restructured residential real estate loans totaling $208; there were no payment defaults during the three months ended March 31, 2015.

 

6. Other assets:

 

The components of other assets at March 31, 2016, and December 31, 2015 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

    

 

March 31, 2016

    

 

December 31, 2015

 

Other real estate owned

 

$

1,409

 

$

957

 

Investment in residential housing program

 

 

8,669

 

 

6,744

 

Mortgage servicing rights

 

 

669

 

 

465

 

Bank owned life insurance

 

 

32,476

 

 

30,782

 

Restricted equity securities

 

 

6,201

 

 

5,403

 

Other assets

 

 

14,179

 

 

14,136

 

Total

 

$

63,603

 

$

58,487

 

 

 

7. Fair value estimates:

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure under GAAP. Fair value estimates are calculated without attempting to estimate the value of anticipated future business and the value of certain assets and liabilities that are not considered financial. Accordingly, such assets and liabilities are excluded from disclosure requirements.

 

 

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that

19


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

regard, the derived fair value estimates cannot be substantiated by comparison to independent markets. In many cases, these values cannot be realized in immediate settlement of the instrument.

 

Current fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction that is not a forced liquidation or distressed sale between participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

In accordance with GAAP, the Company groups its assets and liabilities generally measured at fair value into three levels based on market information or other fair value estimates in which the assets and liabilities are traded or valued and the reliability of the assumptions used to determine fair value. These levels include:

 

·

Level 1: Unadjusted quoted prices of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

·

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

·

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value estimate.

 

The following methods and assumptions were used by the Company to calculate fair values and related carrying amounts of financial instruments:

 

Cash and cash equivalents: The carrying values of cash and cash equivalents as reported on the balance sheet approximate fair value.

 

Investment securities: The fair values of U.S. Treasury securities and marketable equity securities are based on quoted market prices from active exchange markets. The fair values of debt securities are based on pricing from a matrix pricing model. 

 

Loans held for sale: The fair values of loans held for sale are based upon current delivery prices in the secondary mortgage market.

 

 

Net loans: For adjustable-rate loans that re-price frequently and with no significant credit risk, fair values are based on carrying values. The fair values of other non-impaired loans are estimated using discounted cash flow analysis, using interest rates currently offered in the market for loans with similar terms to borrowers of similar credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis determined by the loan review function or underlying collateral values, where applicable.

 

Loans acquired in connection with business combinations are recorded at their acquisition date fair value. In order to record the loans at fair value, management made three different types of fair value adjustments. A market rate adjustment was made to adjust for the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. A credit adjustment was made on pools of homogeneous loans representing the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit

20


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

adjustment on distressed loans represents the portion of the loan balance that has been deemed uncollectible based on the management’s expectations of future cash flows for each respective loan.

 

Mortgage servicing rights: To determine the fair value, the Company estimates the present value of future cash flows incorporating assumptions such as cost of servicing, discount rates, prepayment speeds and default rates. 

 

Accrued interest receivable: The carrying value of accrued interest receivable as reported on the balance sheet approximates fair value.

 

Restricted equity securities: The carrying values of restricted equity securities approximate fair value, due to the lack of marketability for these securities.

 

Deposits: The fair values of noninterest-bearing deposits and savings, NOW and money market accounts are the amounts payable on demand at the reporting date. The fair value estimates do not include the benefit that results from such low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The carrying values of adjustable-rate, fixed-term time deposits approximate their fair values at the reporting date. For fixed-rate time deposits, the present value of future cash flows is used to estimate fair values. The discount rates used are the current rates offered for time deposits with similar maturities.

 

The fair value assigned to the core deposit intangible asset represents the future economic benefit of the potential cost savings from acquiring core deposits in the 2013 Penseco merger compared to the cost of obtaining alternative funding such as brokered deposits from market sources. Management utilized an income valuation approach to present value the estimated future cash savings in order to determine the fair value of the intangible asset.

 

Short-term borrowings: The carrying values of short-term borrowings approximate fair value.

 

Long-term debt: The fair value of fixed-rate long-term debt is based on the present value of future cash flows. The discount rate used is the current rate offered for long-term debt with the same maturity.

 

Accrued interest payable: The carrying value of accrued interest payable as reported on the balance sheet approximates fair value.

 

Off-balance sheet financial instruments:

 

The majority of commitments to extend credit, unused portions of lines of credit and standby letters of credit carry current market interest rates if converted to loans. Because such commitments are generally unassignable of either the Company or the borrower, they only have value to the Company and the borrower. None of the commitments are subject to undue credit risk. The estimated fair values of off-balance sheet financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of off-balance sheet financial instruments was not material at March 31, 2016 and December 31, 2015.

 

 

21


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

Assets and liabilities measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

March 31, 2016

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

U.S. Government-sponsored enterprises

 

$

65,054

 

$

 

 

$

65,054

 

$

 

 

State and Municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

15,783

 

 

 

 

 

15,783

 

 

 

 

Tax-exempt

 

 

124,014

 

 

 

 

 

124,014

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

29,208

 

 

 

 

 

29,208

 

 

 

 

U.S. Government-sponsored enterprises

 

 

30,116

 

 

 

 

 

30,116

 

 

 

 

Total

 

$

264,175

 

$

 

 

$

264,175

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

December 31, 2015

    

Amount

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

U.S. Treasury securities

    

$

9,999

    

$

9,999

    

 

 

    

$

 

 

U.S. Government-sponsored enterprises

 

 

69,060

 

 

 

 

$

69,060

 

 

 

 

State and Municipals:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

16,545

 

 

 

 

 

16,545

 

 

 

 

Tax-exempt

 

 

124,924

 

 

 

 

 

124,924

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

 

31,568

 

 

 

 

 

31,568

 

 

 

 

U.S. Government-sponsored enterprises

 

 

32,839

 

 

 

 

 

32,839

 

 

 

 

Total

 

$

284,935

 

$

9,999

 

$

274,936

 

$

 

 

 

Assets and liabilities measured at fair value on a nonrecurring basis at March 31, 2016 and December 31, 2015 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

 

 

Active Markets for

 

Other Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

March 31, 2016

    

Amount 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Impaired loans

    

$

4,549

    

 

 

    

 

 

    

$

4,549

 

Other real estate owned

 

$

1,242

 

 

 

 

 

 

 

$

1,242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurement Using 

 

 

 

 

 

 

Quoted Prices in

 

Significant Other

 

Significant

 

 

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

December 31, 2015

    

Amount 

    

(Level 1)

    

(Level 2)

    

(Level 3)

 

Impaired loans

    

$

4,944

    

 

 

    

 

 

    

$

4,944

 

Other real estate owned

 

$

878

 

 

 

 

 

 

 

$

878

 

 

Fair values of impaired loans are based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

 

22


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements 

 

 

 

Fair Value

 

 

 

 

 

Range

 

March 31, 2016

    

Estimate 

    

Valuation Techniques 

    

Unobservable Input 

    

(Weighted Average) 

 

Impaired loans

    

$

4,549

    

Appraisal of collateral

    

Appraisal adjustments

    

3.6% to 97.0%  (59.7)%

 

 

 

 

 

 

 

 

Liquidation expenses

 

3.0% to 6.0% (5.4)%

 

Other real estate owned

 

$

1,242

 

Appraisal of collateral

 

Appraisal adjustments

 

19.8% to 77.3%  (27.9)%

 

 

 

 

 

 

 

 

Liquidation expenses

 

3.0% to 6.0% (5.0)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quantitative Information about Level 3 Fair Value Measurements 

 

 

 

Fair Value

 

 

 

 

 

Range

 

December 31, 2015

    

Estimate 

    

Valuation Techniques 

    

Unobservable Input 

    

(Weighted Average) 

 

Impaired loans

    

$

4,944

    

Appraisal of collateral

    

Appraisal adjustments

    

3.3% to 97.0%  (61.7)%

 

 

 

 

 

 

 

 

Liquidation expenses

 

3.0% to 6.0% (5.4)%

 

Other real estate owned

 

$

878

 

Appraisal of collateral

 

Appraisal adjustments

 

20.0% to 77.3%  (30.3)%

 

 

 

 

 

 

 

 

Liquidation expenses

 

3.0% to 6.0% (5.0)%

 

 

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 Inputs which are not identifiable.

 

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

The carrying and fair values of the Company’s financial instruments at March 31, 2016 and December 31, 2015 and their placement within the fair value hierarchy are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Fair Value Hierarchy 

 

 

 

 

 

 

 

 

 

Quoted

   

 

 

   

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

 

March 31, 2016

    

Value 

    

Value 

    

(level 1) 

    

(level 2) 

    

(Level 3) 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,998

 

$

23,998

 

$

23,998

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

264,175

 

 

264,175

 

 

 

 

$

264,175

 

 

 

 

Held-to-maturity

 

 

11,681

 

 

12,322

 

 

 

 

 

12,322

 

 

 

 

Loans held for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans

 

 

1,395,533

 

 

1,406,148

 

 

 

 

 

 

 

$

1,406,148

 

Accrued interest receivable

 

 

5,455

 

 

5,455

 

 

 

 

 

5,455

 

 

 

 

Mortgage servicing rights

 

 

669

 

 

1,543

 

 

 

 

 

1,543

 

 

 

 

Restricted equity securities

 

 

6,201

 

 

6,201

 

 

 

 

 

6,201

 

 

 

 

Total

 

$

1,707,712

 

$

1,719,842

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,475,459

 

$

1,477,233

 

 

 

 

 

1,477,233

 

 

 

 

Short-term borrowings

 

 

60,350

 

 

60,338

 

 

 

 

 

60,338

 

 

 

 

Long-term debt

 

 

59,773

 

 

61,681

 

 

 

 

 

61,681

 

 

 

 

Accrued interest payable

 

 

506

 

 

506

 

 

 

 

$

506

 

 

 

 

Total

 

$

1,596,088

 

$

1,599,758

 

 

 

 

 

 

 

 

 

 

 

 

 

23


 

Table of Contents

Peoples Financial Services Corp.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Fair Value Hierarchy 

 

 

 

 

 

 

 

 

 

Quoted

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active

 

Significant

 

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

 

December 31, 2015

    

Value 

    

Value 

    

(level 1) 

    

(level 2) 

    

(Level 3) 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,917

 

$

32,917

 

$

32,917

 

 

 

 

 

 

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

284,935

 

 

284,935

 

$

9,999

 

$

274,936

 

 

 

 

Held-to-maturity

 

 

12,109

 

 

12,606

 

 

 

 

 

12,606

 

 

 

 

Loans held for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans

 

 

1,327,890

 

 

1,330,900

 

 

 

 

 

 

 

$

1,330,900

 

Accrued interest receivable

 

 

5,796

 

 

5,796

 

 

 

 

 

5,796

 

 

 

 

Mortgage servicing rights

 

 

465

 

 

1,543

 

 

 

 

 

1,543

 

 

 

 

Restricted equity securities

 

 

5,403

 

 

5,403

 

 

 

 

 

5,403

 

 

 

 

Total

 

$

1,669,515

 

$

1,674,100

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,455,810

 

$

1,455,979

 

 

 

 

 

1,455,979

 

 

 

 

Short-term borrowings

 

 

38,325

 

 

38,325

 

 

 

 

 

38,325

 

 

 

 

Long-term debt

 

 

60,354

 

 

61,412

 

 

 

 

 

61,412

 

 

 

 

Accrued interest payable

 

 

560

 

 

560

 

 

 

 

$

560

 

 

 

 

Total

 

$

1,555,049

 

$

1,556,276

 

 

 

 

 

 

 

 

 

 

 

 

8. Employee benefit plans:

 

The Company provides an Employee Stock Ownership Plan (“ESOP”) and a Retirement Profit Sharing Plan. The Company also maintains a Supplemental Executive Retirement Plan (“SERP”), an Employees’ Pension Plan, which is currently frozen, and a Postretirement Plan Life Insurance plan which was curtailed in 2013.

 

For the three months ended March 31, salaries and employee benefits expense includes approximately $274 in 2016 and $279 in 2015 relating to the employee benefit plans.

 

Components of net periodic benefit cost are as follows:

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Three Months Ended March 31, 

    

2016

    

2015

    

Components of net periodic pension cost:

    

 

 

    

 

 

 

Service cost

 

$

166

 

$

174

 

Interest cost

 

 

(223)

 

 

(233)

 

Amortization of unrecognized net gain

 

 

52

 

 

50

 

Net periodic other benefit cost

 

$

(5)

 

$

(9)

 

 

 

 

 

 

 

 

24


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this report, and with our audited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Cautionary Note Regarding Forward-Looking Statements:

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. These statements are based on assumptions and may describe future plans, strategies and expectations of Peoples Financial Services Corp. and its direct and indirect subsidiaries. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. All statements in this report, other than statements of historical facts, are forward-looking statements.

 

Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Important factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to: our ability to achieve the intended benefits of the 2013 merger with Penseco Financial Services Corporation or other risks associated with business combinations; changes in interest rates; economic conditions, particularly in our market area; legislative and regulatory changes and the ability to comply with the significant laws and regulations governing the banking and financial services business; monetary and fiscal policies of the U.S. government, including policies of the U.S. Department of Treasury and the Federal Reserve System; credit risk associated with lending activities and changes in the quality and composition of our loan and investment portfolios; demand for loan and other products; deposit flows; competition; changes in the values of real estate and other collateral securing the loan portfolio, particularly in our market area; changes in relevant accounting principles and guidelines; inability of third party service providers to perform; and our ability to prevent, detect and respond to cyberattacks. Additional factors that may affect our results are discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, and in reports we file with the Securities and Exchange Commission from time to time.

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Peoples Financial Services Corp. does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

 

Notes to the Consolidated Financial Statements referred to in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are incorporated by reference into the MD&A. Certain prior period amounts may have been reclassified to conform with the current year’s presentation. Any reclassifications did not have any effect on the operating results or financial position of the Company.

 

Critical Accounting Policies:

 

Disclosure of our significant accounting policies are included in Note 1 to the consolidated financial statements of the Annual Report on Form 10-K for the year ended December 31, 2015. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions.

 

Operating Environment:

 

The Federal Open Market Committee (“FOMC”) remained on hold during the first quarter of 2016 citing global conditions, soft business investment, and weak exports as areas of concern. The FOMC noted improvement in labor markets. However, moderation to household spending was also noted although household real income has risen and consumer sentiment remains high. First quarter gross domestic product (“GDP”), the value of all goods and services produced in the Nation, came in at an annualized rate of 0.5% for the first quarter of 2016, down from 1.4% in the fourth quarter of 2015 while the consumer price index (“CPI”) increased only moderately for the 12 months ended March 31, 2016 at 2.2% from 2.1% for the 12 months ended December 31, 2015.

25


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

 

Review of Financial Position:

 

Total assets increased $43,312, or 9.6% annualized, to $1,862,370 at March 31, 2016, from $1,819,058 at December 31, 2015. Loans, net increased to $1,409,691 at March 31, 2016, compared to $1,340,865 at December 31, 2015, an increase of $68,826 or 20.6% annualized. The increase in loans, net during 2016 has been funded through a decrease of investment securities available-for-sale and increases in deposits and short-term borrowings. Investment securities decreased $21,188 or 7.1% in 2016. Interest-bearing deposits increased $17,171; noninterest-bearing deposits increased $2,478. Total stockholders’ equity increased $2,677 or at an annual rate of 4.4%, from $248,768 at year-end 2015 to $251,445 at March 31, 2016. For the three months ended March 31, 2016, total assets averaged $1,851,643, an increase of $140,304 from $1,711,339 for the same period of 2015.

 

Investment Portfolio:

 

The majority of the investment portfolio is held as available-for-sale, which allows for greater flexibility in using the investment portfolio for liquidity purposes by allowing securities to be sold when market opportunities occur. Investment securities available-for-sale totaled $264,175 at March 31, 2016, a decrease of $20,760, or 7.3% from $284,935 at December 31, 2015. The decrease was primarily a result of the sale of U.S. Treasury securities in response to changes in the slope of the yield curve and maturing and called bonds, as well as payments from mortgage backed holdings.  The proceeds were utilized to fund loan demand.  Investment securities held-to-maturity totaled $11,681 at March 31, 2016, a decrease of $428 or 3.5% from $12,109 at December 31, 2015 due to payments received from mortgage backed holdings.

 

For the three months ended March 31, 2016, the investment portfolio averaged $287,207, a decrease of $25,868 or 8.3% compared to $313,075 for the same period last year. The tax-equivalent yield on the investment portfolio increased 8 basis points to 2.86% for the three months ended March 31, 2016, from 2.78% for the comparable period of 2015.

 

Securities available-for-sale are carried at fair value, with unrealized gains or losses net of deferred income taxes reported in the accumulated other comprehensive income (loss) component of stockholders’ equity. We reported net unrealized gains, included as a separate component of stockholders’ equity of $3,475, net of deferred income taxes of $1,871, at March 31, 2016, and $2,986, net of deferred income taxes of $1,607, at December 31, 2015.

 

Our Asset/Liability Committee (“ALCO”) reviews the performance and risk elements of the investment portfolio quarterly. Through active balance sheet management and analysis of the securities portfolio, we endeavor to maintain sufficient liquidity to satisfy depositor requirements and meet the credit needs of our customers.

 

Loan Portfolio:

 

Loan growth continued to be strong in the three month period ended March 31, 2016. Loans, net increased to $1,409,691 at March 31, 2016 from $1,340,865 at December 31, 2015, an increase of $68,826 or 20.6% annualized. The growth reflected increases in commercial loans, commercial real estate loans and consumer loans, partially offset by a decrease in residential real estate loans. Commercial loans increased $29,640, or 32.6% annualized, to $395,407 at March 31, 2016 compared to $365,767 at December 31, 2015. Commercial real estate loans increased $31,598 or 22.4% annualized, to $598,875 at March 31, 2016 compared to $567,277 at December 31, 2015. Consumer loans increased $12,120, or 48.0% on an annualized basis, to $113,723 at March 31, 2016 compared to $101,603 at December 31, 2015. The primary contributor to the growth in consumer loans was our indirect loan portfolio which increased $13,615.

 

Residential real estate loans decreased $4,532, or 6.0% on an annualized basis, to $301,686 at March 31, 2016 compared to $306,218 at December 31, 2015. The majority of residential real estate loans originated were sold into the secondary market instead of carried in the portfolio to mitigate interest rate risk in the current low rate environment.

 

 

For the three months ended March 31, 2016, loans, net averaged $1,380,817, an increase of $155,048 or 12.7% compared to $1,225,769 for the same period of 2015. The tax-equivalent yield on the loan portfolio was 4.52% for the three months ended March 31, 2016, an 18 basis point decrease from the comparable period last year. Loan accretion income in the first three months of 2016 and 2015, which we recognized as a result of the 2013 Penseco merger, was $215 and $225. As a result, the tax-equivalent yield on the loan portfolio would have decreased 17 basis points

26


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

comparing the three month ended March 31, 2016 and 2015. The tax-equivalent yield on the loan portfolio remained constant at 4.52% for the first quarter of 2016 as compared to the fourth quarter of 2015.

 

In addition to the risks inherent in our loan portfolio, in the normal course of business, we are also a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These instruments include legally binding commitments to extend credit, unused portions of lines of credit and commercial letters of credit made under the same underwriting standards as on-balance sheet instruments, and may involve, to varying degrees, elements of credit risk and interest rate risk (“IRR”) in excess of the amount recognized in the financial statements.

 

Unused commitments at March 31, 2016, totaled $375,197, consisting of $352,917 in unfunded commitments of existing loan facilities and $22,280 in standby letters of credit. Due to fixed maturity dates, specified conditions within these instruments, and the ultimate needs of our customers, many will expire without being drawn upon. We believe that amounts actually drawn upon can be funded in the normal course of operations and therefore, do not represent a significant liquidity risk to us. In comparison, unused commitments at December 31, 2015 totaled $329,822, consisting of $309,805 in unfunded commitments of existing loans and $20,017 in standby letters of credit.

 

Asset Quality:

 

National, Pennsylvania, New York and market area unemployment rates at March 31, 2016 and 2015, are summarized as follows:

 

 

 

 

 

 

 

 

    

March 31, 2016

    

March 31, 2015

 

United States

 

5.0

%  

5.5

%  

New York

 

5.3

 

6.1

 

Pennsylvania

 

5.3

 

5.7

 

Broome County

 

6.0

 

7.1

 

Bucks County

 

4.5

 

5.1

 

Lackawanna County

 

5.7

 

6.5

 

Lehigh County

 

5.3

 

5.9

 

Luzerne County

 

6.5

 

7.3

 

Monroe County

 

6.2

 

7.2

 

Montgomery County

 

4.0

 

4.5

 

Susquehanna County

 

6.4

 

6.6

 

Wayne County

 

6.7

 

7.5

 

Wyoming County

 

7.0

%  

6.8

%  

 

The employment conditions improved for the Nation, Pennsylvania, and New York and in all but one of the ten counties representing our market areas in Pennsylvania and New York from one year ago. Unemployment rates remained elevated relative to historical levels within many of our market areas.

 

Our asset quality improved slightly in the first quarter of 2016. Nonperforming assets decreased $58 or 0.5% to $12,406 at March 31, 2016, from $12,464 at December 31, 2015. We experienced a decrease in nonaccrual and restructured loans, which was partially offset by an increase in other real estate owned and accruing loans past due 90 days or more. As a percentage of loans, net and foreclosed assets, nonperforming assets equaled 0.88% at March 31, 2016 compared to 0.93% at December 31, 2015.

 

Loans on nonaccrual status decreased $720 to $9,651 at March 31, 2016 from $10,371 at December 31, 2015. The majority of the decrease from year end was due to a decrease of $1,755 in residential real estate loans. Nonaccrual commercial loans increased $181, commercial real estate loans increased $824, and nonaccrual consumer loans increased $30. Other real estate owned increased $452 to $1,409 at March 31, 2016 from $957 at December 31, 2015, as loans were transferred from non-accrual status.

 

Generally, maintaining a high loan to deposit ratio is our primary goal in order to maximize profitability. However, this objective is superseded by our attempts to assure that asset quality remains strong. We continued our efforts to maintain sound underwriting standards for both commercial and consumer credit. Most commercial lending is done primarily with locally owned small businesses.

27


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

 

We maintain the allowance for loan losses at a level we believe adequate to absorb probable credit losses related to specifically identified loans, as well as probable incurred loan losses inherent in the remainder of the loan portfolio as of the balance sheet date. The allowance for loan losses is based on past events and current economic conditions. We employ the Federal Financial Institutions Examination Council Interagency Policy Statement, as amended December 13, 2006, and GAAP in assessing the adequacy of the allowance account. Under GAAP, the adequacy of the allowance account is determined based on the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 310, “Receivables,” for loans specifically identified to be individually evaluated for impairment and the requirements of FASB ASC 450, “Contingencies,” for large groups of smaller-balance homogeneous loans to be collectively evaluated for impairment.

 

We follow our systematic methodology in accordance with procedural discipline by applying it in the same manner regardless of whether the allowance is being determined at a high point or a low point in the economic cycle. Each quarter, loan review identifies those loans to be individually evaluated for impairment and those loans collectively evaluated for impairment utilizing a standard criteria. Internal loan review grades are assigned quarterly to loans identified to be individually evaluated. A loan’s grade may differ from period to period based on current conditions and events, however, we consistently utilize the same grading system each quarter. We consistently use loss experience from the latest twelve quarters in determining the historical loss factor for each pool collectively evaluated for impairment. Qualitative factors are evaluated in the same manner each quarter and are adjusted within a relevant range of values based on current conditions. For additional disclosure related to the allowance for loan losses refer to the note entitled, “Loans, net and Allowance for Loan Losses,” in the Notes to Consolidated Financial Statements to this Quarterly Report.

 

 The allowance for loan losses increased $1,183 to $14,158 at March 31, 2016, from $12,975 at the end of 2015. For the three months ended March 31, 2016, net charge-offs were $17 or 0.01% of average loans outstanding, a $268 decrease compared to $285 or 0.09% of average loans outstanding in the same period of 2015.

 

Deposits:

 

We attract the majority of our deposits from within our ten county market area that stretches from Montgomery County in Pennsylvania to Broome County in the Southern Tier of New York State through the offering of various deposit instruments including demand deposit accounts, NOW accounts, money market deposit accounts, savings accounts, and time deposits, including certificates of deposit and IRA’s. For the three months ended March 31, 2016, total deposits increased to $1,475,459 from $1,455,810 at December 31, 2015. Interest-bearing deposits increased $17,171 and noninterest-bearing deposits increased $2,478. Interest-bearing transaction accounts, including NOW and money market accounts, increased $11,417, or 9.7% annualized, to $487,679 at March 31, 2016, from $476,262 at December 31, 2015. Time deposits less than $100 decreased $434, or 1.0% annualized, to $183,460 at March 31, 2016, from $183,894 at December 31, 2015. Increases in savings accounts of $3,631 and time deposits $100 or more of $2,557 were recorded in the three months ended March 31, 2016.

 

For the three months ended March 31, 2016 interest-bearing deposits averaged $1,159,159 in 2016 compared to $1,109,914 in 2015. The cost of interest-bearing deposits was 0.45% in 2016 compared to 0.46% for the same period last year. For the first three months, the overall cost of interest-bearing liabilities including the cost of borrowed funds, was 0.54% in both 2016 and 2015.

 

Borrowings:

 

The Bank utilizes borrowings as a secondary source of liquidity for its asset/liability management. Advances are available from the Federal Home Loan Bank of Pittsburgh (“FHLB) provided certain standards related to credit worthiness have been met. Repurchase and term agreements are also available from the FHLB.

 

Total short-term borrowings at March 31, 2016, totaled $60,350 compared to $38,325 at December 31, 2015, an increase of $22,025. Long-term debt was $59,773 at March 31, 2016, compared to $60,354 at year end 2015. The increase in short-term borrowing was a function of strong loan demand whereas the decline in long-term debt was a product of monthly contractual amortized payments made during the three months ended March 31, 2016.

 

28


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

Market Risk Sensitivity:

 

Market risk is the risk to our earnings or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily “IRR” associated with our lending, investing and deposit-gathering activities. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in our reported earnings and/or the market value of our net worth. Variations in interest rates affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. Interest rate changes also affect the underlying economic value of our assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value and provide a basis for the expected change in future earnings related to interest rates. IRR is inherent in the role of banks as financial intermediaries. However, a bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

 

As a result of economic uncertainty and a prolonged era of historically low market rates, it has become challenging to manage IRR. Due to these factors, IRR and effectively managing it are very important to both bank management and regulators. Bank regulations require us to develop and maintain an IRR management program, overseen by the Board of Directors and senior management, that involves a comprehensive risk management process in order to effectively identify, measure, monitor and control risk. Should bank regulatory agencies identify a material weakness in our risk management process or high exposure relative to our capital, bank regulatory agencies may take action to remedy these shortcomings. Moreover, the level of IRR exposure and the quality of our risk management process is a determining factor when evaluating capital adequacy.

 

The ALCO, comprised of members of our Board of Directors, senior management and other appropriate officers, oversees our IRR management program. Specifically, ALCO analyzes economic data and market interest rate trends, as well as competitive pressures, and utilizes computerized modeling techniques to reveal potential exposure to IRR. This allows us to monitor and attempt to control the influence these factors may have on our rate-sensitive assets (“RSA”) and rate-sensitive liabilities (“RSL”), and overall operating results and financial position. One such technique utilizes a static gap model that considers repricing frequencies of RSA and RSL in order to monitor IRR. Gap analysis attempts to measure our interest rate exposure by calculating the net amount of RSA and RSL that reprice within specific time intervals. A positive gap occurs when the amount of RSA repricing in a specific period is greater than the amount of RSL repricing within that same time frame and is indicated by a RSA/RSL ratio greater than 1.0. A negative gap occurs when the amount of RSL repricing is greater than the amount of RSA and is indicated by a RSA/RSL ratio of less than 1.0. A positive gap implies that earnings will be impacted favorably if interest rates rise and adversely if interest rates fall during the period. A negative gap tends to indicate that earnings will be affected inversely to interest rate changes.

 

Our cumulative one-year RSA/RSL ratio equaled 1.87% at March 31, 2016. Given the length of time that market rates have been at historical lows and the potential for rates to increase in the future, the focus of ALCO has been to create a positive static gap position. With regard to RSA, we predominantly offer medium- term, fixed-rate loans as well as adjustable rate loans. With respect to RSL, we offer longer term promotional certificates of deposit in an attempt to increase duration. The current position at March 31, 2016, indicates that the amount of RSA repricing within one year would exceed that of RSL, thereby causing net interest income to increase as market rates increase. However, these forward-looking statements are qualified in the aforementioned section entitled “Forward-Looking Discussion” in this Management’s Discussion and Analysis.

 

Static gap analysis, although a standard measuring tool, does not fully illustrate the impact of interest rate changes on future earnings. First, market rate changes normally do not equally or simultaneously affect all categories of assets and liabilities. Second, assets and liabilities that can contractually reprice within the same period may not do so at the same time or to the same magnitude. Third, the interest rate sensitivity table presents a one-day position. Variations occur daily as we adjust our rate sensitivity throughout the year. Finally, assumptions must be made in constructing such a table.

 

29


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

As the static gap report fails to address the dynamic changes in the balance sheet composition or prevailing interest rates, we utilize a simulation model to enhance our asset/liability management. This model is used to create pro forma net interest income scenarios under various interest rate shocks. Model results at March 31, 2016, produced results similar to those indicated by the one-year static gap position. In addition, parallel and instantaneous shifts in interest rates under various interest rate shocks resulted in changes in net interest income that were well within ALCO policy limits. We will continue to monitor our IRR throughout 2016 and endeavor to employ deposit and loan pricing strategies and direct the reinvestment of loan and investment repayments in order to manage our IRR position.

 

Financial institutions are affected differently by inflation than commercial and industrial companies that have significant investments in fixed assets and inventories. Most of our assets are monetary in nature and change correspondingly with variations in the inflation rate. It is difficult to precisely measure the impact inflation has on us, however we believe that our exposure to inflation can be mitigated through asset/liability management.

 

Liquidity:

 

Liquidity management is essential to our continuing operations and enables us to meet financial obligations as they come due, as well as to take advantage of new business opportunities as they arise. Financial obligations include, but are not limited to, the following:

 

·

Funding new and existing loan commitments;

 

·

Payment of deposits on demand or at their contractual maturity;

 

·

Repayment of borrowings as they mature;

 

·

Payment of lease obligations; and

 

·

Payment of operating expenses.

 

These obligations are managed daily, thus enabling us to effectively monitor fluctuations in our liquidity position and to adapt that position according to market influences and balance sheet trends. Future liquidity needs are forecasted and strategies are developed to ensure adequate liquidity at all times.

 

Historically, core deposits have been the primary source of liquidity because of their stability and lower cost, in general, than other types of funding. Providing additional sources of funds are loan and investment payments and prepayments and the ability to sell both available for sale securities and mortgage loans held for sale. We believe liquidity is adequate to meet both present and future financial obligations and commitments on a timely basis.

 

We employ a number of analytical techniques in assessing the adequacy of our liquidity position. One such technique is the use of ratio analysis to determine the extent of our reliance on noncore funds to fund our investments and loans maturing after March 31, 2016. Our noncore funds at March 31, 2016, were comprised of time deposits in denominations of $100 or more and other borrowings. These funds are not considered to be a strong source of liquidity because they are very interest rate sensitive and are considered to be highly volatile. At March 31, 2016, our net noncore funding dependence ratio, the difference between noncore funds and short-term investments to long-term assets, was 13.9%, while our net short-term noncore funding dependence ratio, noncore funds maturing within one-year, less short-term investments to long-term assets equaled 6.6%. Comparatively, our overall noncore dependence ratio at year-end 2015 was 11.3% and our net short-term noncore funding dependence ratio was 4.1%, indicating that our reliance on noncore funds has increased.

 

The Consolidated Statements of Cash Flows present the changes in cash and cash equivalents from operating, investing and financing activities. Cash and cash equivalents, consisting of cash on hand, cash items in the process of collection, deposit balances with other banks and federal funds sold, decreased $8,919 during the three months ended March 31, 2016. Cash and cash equivalents increased $8,205 for the same period last year. For the three months ended March 31, 2016, net cash inflows of $6,633 from operating activities and $38,538 from financing activities were more than offset by net cash outflows of $54,090 from investing activities. For the same period of 2015, net cash inflows of $7,361 from

30


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

operating activities and $32,631 from investing activities were partially offset by net cash outflows of $31,787 from financing activities.

 

Operating activities provided net cash of $6,633 for the three months ended March 31, 2016, and $7,361 for the corresponding three months of 2015. Net income, adjusted for the effects of gains and losses along with noncash transactions such as depreciation and the provision for loan losses, is the primary source of funds from operations.

 

Investing activities primarily include transactions related to our lending activities and investment portfolio. Investing activities used net cash of $54,090 for the three months ended March 31, 2016, compared to providing $32,631 for the same period of 2015. In 2016, an increase in lending activities was the primary factor causing the net cash outflow from investing activities. Investment portfolio activities was the predominant factor causing the net cash inflow from investing activities in 2015.

 

 Financing activities provided net cash of $38,538 for the three months ended March 31, 2016, and used net cash of $31,787 for the corresponding three months of 2015. Deposit gathering is our predominant financing activity. Deposits increased for the three months ended March 31, 2016 and decreased during the three months ended March 31, 2015. The net increase in deposits totaled $19,798 in the three months ended March 31, 2016. Comparatively, deposit runoff used net cash of $9,081 for the same period of 2015. We continued to attract deposits from new markets and customers as well as existing customers, including municipalities and school districts, and deposits gathered in relation to natural gas activity within existing markets in Susquehanna and Wyoming Counties of Pennsylvania.  Another source of financing is our short term borrowings which increased $22,025 in the three months ended March 31, 2016 compared to a net decrease of $19,557 in the first quarter of 2015.

 

We believe that our future liquidity needs will be satisfied through maintaining an adequate level of cash and cash equivalents, by maintaining readily available access to traditional funding sources, and through proceeds received from the investment and loan portfolios. The current sources of funds will enable us to meet all cash obligations as they come due.

 

Capital:

 

Stockholders’ equity totaled $251,445 or $33.98 per share at March 31, 2016, compared to $248,768 or $32.57 per share at December 31, 2015. Net income of $4,882 for the three months ended March 31, 2016 was the primary factor leading to the improved capital position. Stockholders’ equity was also affected by cash dividends declared of $2,295, shares retired of $417, stock based compensation of $18, and other comprehensive income resulting from market value fluctuations in the investment portfolio of $489.

 

Dividends declared equaled $0.31per share for the first quarter of 2016 and 2015. The dividend payout ratio was 47.0% for the three months ended March 31, 2016 and 46.4% for the same period of 2015. The merger agreement pursuant to which we merged with Penseco in 2013 contemplates that, unless 80 percent of our board of directors determines otherwise, we will pay a quarterly cash dividend in an amount no less than $0.31 per share through 2018, provided that sufficient funds are legally available, and that Peoples and Peoples Bank remain “Well-capitalized” in accordance with applicable regulatory guidelines. It is the intention of the Board of Directors to continue to pay cash dividends in the future. However, these decisions are affected by operating results, financial and economic decisions, capital and growth objectives, appropriate dividend restrictions and other relevant factors.

 

In July 2013, the Board of Directors of the FRB approved the Basel III interim final rule (“Basel III”) which is intended to strengthen the quality and increase the required level of regulatory capital for a more stable and resilient banking system. The changes include: (i) a new regulatory capital measure, Common Equity Tier 1 (“CET1”), which is limited to capital elements of the highest quality; (ii) a new definition and increase of tier 1 capital which is now comprised of CET1 and Additional Tier 1; (iii) changes in calculation of some risk-weighted assets and off-balance sheet exposure; and (iv) a capital conservation buffer that will limit capital distributions, stock redemptions, and certain discretionary bonus payments if the institution does not maintain capital in excess of the minimum capital requirements. These new capital rules took effect for our Bank on January 1, 2015 and reporting began with the quarter ended March 31, 2015. Under the final capital rules that became effective on January 1, 2015, there was a requirement for a CET1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital

31


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement is being phased in over three years beginning in 2016.

 

The adequacy of capital is reviewed on an ongoing basis with reference to the size, composition and quality of resources and regulatory guidelines. We seek to maintain a level of capital sufficient to support existing assets and anticipated asset growth, maintain favorable access to capital markets, and preserve high quality credit ratings. At March 31, 2016, the Bank’s Tier 1 capital to total average assets was 10.17% as compared to 10.48% at December 31, 2015. The Bank’s Tier 1 capital to risk weighted asset ratio was 12.52% and the total capital to risk weighted asset ratio was 13.50% at March 31, 2016. These ratios were 13.11% and 14.05% at December 31, 2015. The Bank’s common equity Tier 1 to risk weighted asset ratio was 12.52% at March 31, 2016 compared to 13.11% at December 31, 2015. The Bank was deemed to be well-capitalized under regulatory standards at March 31, 2016. Additionally, as of March 31, 2016, the Bank would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect.

 

Review of Financial Performance:

 

Net income for the first quarter of 2016 equaled $4,882 or $0.66 per share compared to $5,044 or $0.67 per share for the first quarter of 2015. Return on average assets (“ROA”) measures our net income in relation to total assets. Our ROA was 1.06% for the first quarter of 2016 compared to 1.20% for the same period of 2015. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by stockholders. Our ROE was 7.85% for the first quarter of 2016 compared to 8.28% for the comparable period in 2015. Gains on sale of investment securities were $242 for the three months ended March 31, 2016 and $832 for the same period in 2015.

 

Net Interest Income:

 

Net interest income is the fundamental source of earnings for commercial banks. Fluctuations in the level of net interest income can have the greatest impact on net profits. Net interest income is defined as the difference between interest revenue, interest and fees earned on interest-earning assets, and interest expense, the cost of interest-bearing liabilities supporting those assets. The primary sources of earning assets are loans and investment securities, while interest-bearing deposits, short-term and long-term borrowings comprise interest-bearing liabilities. Net interest income is impacted by:

 

·

Variations in the volume, rate and composition of earning assets and interest-bearing liabilities;

 

·

Changes in general market rates; and

 

·

The level of nonperforming assets.

 

Changes in net interest income are measured by the net interest spread and net interest margin. Net interest spread, the difference between the average yield earned on earning assets and the average rate incurred on interest-bearing liabilities, illustrates the effects changing interest rates have on profitability. Net interest margin, net interest income as a percentage of earning assets, is a more comprehensive ratio, as it reflects not only the spread, but also the change in the composition of interest-earning assets and interest-bearing liabilities. Tax-exempt loans and investments carry pre-tax yields lower than their taxable counterparts. Therefore, in order to make the analysis of net interest income more comparable, tax-exempt income and yields are reported herein on a tax-equivalent basis using the prevailing federal statutory tax rate of 35.0% in 2016 and 2015.

 

For the three months ended March 31, tax-equivalent net interest income increased $1,014 to $15,841 in 2016 from $14,827 in 2015. The net interest spread decreased to 3.68% for the three months ended March 31, 2016 from 3.74% for the three months ended March 31, 2015. The tax-equivalent net interest margin decreased to 3.81% for the first quarter of 2016 from 3.88% for the comparable period of 2015. The tax-equivalent net interest margin for the fourth quarter of 2015 was 3.79%. Loan accretion in the first quarter of 2016 related to loans acquired in the 2013 Penseco merger was $215, resulting in an increase in the tax-equivalent net interest margin of 5 basis points. Comparatively, loan accretion recognized on these loans in the first quarter of 2015 was $225 resulting in an increase in the tax-equivalent net interest

32


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

margin of 6 basis points. Without such interest income, the tax equivalent net interest margin for the three months ended March 31 would have been 3.76% in 2016 and 3.82% in 2015.

 

For the three months ended March 31, tax-equivalent interest income on earning assets increased $1,199, to $17,561 in 2016 as compared to $16,362 in 2015. The overall yield on earning assets, on a fully tax-equivalent basis, decreased 6 basis points for the three months ended March 31, 2016 59 4.22% as compared to 4.28% for the three months ended March 31, 2015. The decrease in the yield on earning assets resulted from loans being originated or renewed at market rates, which are lower than those maturing and amortizing. The overall yield earned on loans decreased 18 basis points for the first quarter of 2016 to 4.52% from 4.70% for the first quarter of 2015. Average loans increased to $1,380,817 for the quarter ended March 31, 2016 compared to $1,225,769 for the same period in 2015. The resulting tax-equivalent interest earned on loans was $15,501 for the three month period ended March 31, 2016 compared to $14,200 for the same period in 2015, an increase of $1,300.

 

Total interest expense increased $185, to $1,720 for the three months ended March 31, 2016 from $1,535 for the three months ended March 31, 2015. An unfavorable volume variance caused the increase. An increase in the average volume of interest bearing liabilities of $119,646 coupled with the unchanged cost of funds comparing the three months ended March 31, 2016 and 2015 caused the increase.

 

The average balances of assets and liabilities, corresponding interest income and expense and resulting average yields or rates paid are summarized as follows. Averages for earning assets include nonaccrual loans. Investment averages include

33


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

available-for-sale securities at amortized cost. Income on investment securities and loans is adjusted to a tax equivalent basis using the prevailing federal statutory tax rate of 35%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 2016

 

March 2015

 

 

 

Average

 

Interest Income/

 

Yield/

 

Average

 

Interest Income/

 

Yield/

 

 

    

Balance  

    

Interest

    

Rate  

    

Balance  

    

Interest

    

Rate  

    

Assets:

    

 

 

    

 

 

    

 

 

 

 

    

 

 

    

 

 

Earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

$

1,276,491

 

$

14,346

 

4.52

%  

$

1,155,435

 

$

13,340

 

4.68

%  

Tax-exempt

 

 

104,326

 

 

1,155

 

4.45

 

 

70,334

 

 

860

 

4.96

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

159,584

 

 

697

 

1.76

 

 

219,360

 

 

909

 

1.68

 

Tax-exempt

 

 

127,623

 

 

1,346

 

4.24

 

 

93,715

 

 

1,238

 

5.36

 

Interest-bearing deposits

 

 

4,686

 

 

17

 

1.46

 

 

2,718

 

 

8

 

1.19

 

Federal funds sold

 

 

 

 

 

 

 

 

 

 

8,674

 

 

7

 

0.33

 

Total earning assets

 

 

1,672,710

 

 

17,561

 

4.22

%  

 

1,550,236

 

 

16,362

 

4.28

%  

Less: allowance for loan losses

 

 

13,410

 

 

 

 

 

 

 

10,447

 

 

 

 

 

 

Other assets

 

 

192,343

 

 

 

 

 

 

 

171,550

 

 

 

 

 

 

Total assets

 

$

1,851,643

 

 

 

 

 

 

$

1,711,339

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

206,602

 

 

177

 

0.34

%  

$

251,628

 

 

225

 

0.36

%  

NOW accounts

 

 

293,002

 

 

278

 

0.38

 

 

399,069

 

 

250

 

0.25

 

Savings accounts

 

 

389,230

 

 

175

 

0.18

 

 

197,795

 

 

188

 

0.39

 

Time deposits less than $100

 

 

165,389

 

 

435

 

1.06

 

 

170,998

 

 

449

 

1.06

 

Time deposits $100 or more

 

 

104,936

 

 

218

 

0.84

 

 

90,424

 

 

156

 

0.70

 

Short-term borrowings

 

 

53,436

 

 

77

 

0.58

 

 

10,373

 

 

8

 

0.31

 

Long-term debt

 

 

60,064

 

 

360

 

2.41

 

 

32,726

 

 

259

 

3.21

 

Total interest-bearing liabilities

 

 

1,272,659

 

 

1,720

 

0.54

 

 

1,153,013

 

 

1,535

 

0.54

 

Noninterest-bearing deposits

 

 

313,908

 

 

 

 

 

 

 

298,166

 

 

 

 

 

 

Other liabilities

 

 

15,755

 

 

 

 

 

 

 

13,240

 

 

 

 

 

 

Stockholders’ equity

 

 

249,321

 

 

 

 

 

 

 

246,920

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,851,643

 

 

 

 

 

 

$

1,711,339

 

 

 

 

 

 

Net interest income/spread

 

 

 

 

$

15,841

 

3.68

%  

 

 

 

$

14,827

 

3.74

%  

Net interest margin

 

 

 

 

 

 

 

3.81

%  

 

 

 

 

 

 

3.88

%  

Tax-equivalent adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

$

404

 

 

 

 

 

 

$

301

 

 

 

Investments

 

 

 

 

 

471

 

 

 

 

 

 

 

433

 

 

 

Total adjustments

 

 

 

 

$

875

 

 

 

 

 

 

$

734

 

 

 

 

Provision for Loan Losses:

 

We evaluate the adequacy of the allowance for loan losses account on a quarterly basis utilizing our systematic analysis in accordance with procedural discipline. We take into consideration certain factors such as composition of the loan portfolio, volumes of nonperforming loans, volumes of net charge-offs, prevailing economic conditions and other relevant factors when determining the adequacy of the allowance for loan losses account. We make monthly provisions to the allowance for loan losses account in order to maintain the allowance at the appropriate level indicated by our evaluations. Based on our most current evaluation, we believe that the allowance is adequate to absorb any known and inherent losses in the portfolio as of March 31, 2016.

 

34


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

For the three months ended March 31, 2016, the provision for loan losses totaled $1,200, compared to $750 for the same period in 2015. The increase in the provision in the first quarter of 2016 was primarily a result of greater loan growth.

 

Noninterest Income:

 

For the three months ended March 31, 2016, noninterest income totaled $3,891, a decrease of $418 or 9.7% from $4,309 for the comparable period of 2015. Service charges, fees and commissions decreased $168, or 10.4% to $1,444 through three months in 2016 from $1,612 for the same period in 2015. Merchant services income increased $124 to $914 for the three months ended March 31, 2016 from $790 for the same period last year as a result of an increase in the number of merchant accounts serviced. Income generated from commissions and fees on fiduciary activities increased $23 to $482 for the three months ended March 31, 2016 in comparison to $459 for the same period in 2015 due to additional executor fees generated in 2016. Income generated from our wealth management division increased $207 to $412 through the first three months of 2016 in comparison to $205 over that same period in 2015 due to the addition of retirement plan servicing to the wealth management platform in 2016. Mortgage banking income decreased $18 to $204 for the first three months of 2016 compared to $222 for the comparable period in 2015 as the volume of loans originated for sale declined. Life insurance investment income increased $4 to $193 for the three months ended March 31, 2016 from $189 for the same period in 2015. We purchased an additional $1,500 of bank owned life insurance in February 2016. Gains from the sale of investment securities available-for-sale decreased to $242 for the three months ended March 31, 2016 compared to $832 for the same period in 2015.

 

Noninterest Expenses:

 

In general, noninterest expense is categorized into three main groups: employee-related expenses, occupancy and equipment expenses and other expenses. Employee-related expenses are costs associated with providing salaries, including payroll taxes and benefits, to our employees. Occupancy and equipment expenses, the costs related to the maintenance of facilities and equipment, include depreciation, general maintenance and repairs, real estate taxes, rental expense offset by any rental income, and utility costs. Other expenses include general operating expenses such as advertising, contractual services, insurance, including FDIC assessment, other taxes and supplies. Several of these costs and expenses are variable while the remainder are fixed. We utilize budgets and other related strategies in an effort to control the variable expenses.

 

For the first quarter, noninterest expense increased $524 or 4.7% to $11,618 in 2016 from $11,094 in 2015. Personnel costs increased 1.9%, net occupancy and equipment costs decreased 1.3%, merchant services expense increased 18.6% and other expenses increased by 14.0% comparing year-to-date 2016 and 2015.

 

Salaries and employee benefits expense, which comprise the majority of noninterest expense, totaled $5,332 for the first quarter of 2016, an increase of $99 or 1.9% when compared to the first quarter of 2015. Costs related to our build out of our expansion plan and wealth management group, as well as standard merit increases contributed to the increase.

 

We experienced a $31 or 1.3% decrease in net occupancy and equipment expense comparing $2,437 for the first quarter of 2016 and $2,468 for the same period in 2015. Unusually mild winter conditions led to a decrease in heating costs as well as a decrease in costs associated with snow removal during the first part of 2016 when compared to the first three months of 2015.

 

Merchant services expense increased $99 or 18.6% to $632 for the three months ended March 31, 2016 from $533 for the same period in 2015. The increase due to higher volumes correlates directly to the increase in merchant services income for the quarter ended March 31, 2016.

 

For the three months ended March 31, other expenses increased $357 or 14.0% to $2,912 from $2,555 comparing 2016 to 2015. Higher contributions to the earned income tax credit (EITC) program of $205, in the current period, along with higher recruiting costs, coupled with gains on other real estate owned in the prior period were the primary reason for the increase.

 

35


 

Table of Contents

Peoples Financial Services Corp.

Management’s Discussion and Analysis

(Dollars in thousands, except per share data)

 

Income Taxes:

We recorded income tax expense of $1,157 or 19.2% of pre-tax income, and $1,514 or 23.1% of pre-tax income for the three months ended March 31, 2016 and 2015. The three months ended March 31, 2016 includes before tax investment tax credits of $306 compared to $268 for that same period last year.

 

 

36


 

Table of Contents

Peoples Financial Services Corp.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

Market risk is the risk to our earnings and/or financial position resulting from adverse changes in market rates or prices, such as interest rates, foreign exchange rates or equity prices. Our exposure to market risk is primarily interest rate risk (“IRR”), which arises from our lending, investing and deposit gathering activities. Our market risk sensitive instruments consist of non-derivative financial instruments, none of which are entered into for trading purposes. During the normal course of business, we are not exposed to foreign exchange risk or commodity price risk. Our exposure to IRR can be explained as the potential for change in reported earnings and/or the market value of net worth. Variations in interest rates affect the underlying economic value of assets, liabilities and off-balance sheet items. These changes arise because the present value of future cash flows, and often the cash flows themselves, change with interest rates. The effects of the changes in these present values reflect the change in our underlying economic value, and provide a basis for the expected change in future earnings related to interest rates. Interest rate changes affect earnings by changing net interest income and the level of other interest-sensitive income and operating expenses. IRR is inherent in the role of banks as financial intermediaries.

 

A bank with a high degree of IRR may experience lower earnings, impaired liquidity and capital positions, and most likely, a greater risk of insolvency. Therefore, banks must carefully evaluate IRR to promote safety and soundness in their activities.

 

The projected impacts of instantaneous changes in interest rates on our net interest income and economic value of equity at March 31, 2016, based on our simulation model, as compared to our ALCO policy limits are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

% Change in  

 

Changes in Interest Rates (basis points)

 

Net Interest Income 

 

Economic Value of Equity 

 

 

    

Metric 

    

Policy 

    

Metric 

    

Policy 

 

+400

    

4.1

    

(20.0)

    

8.3

    

(45.0)

 

+300

 

3.6

 

(20.0)

 

7.7

 

(35.0)

 

+200

 

2.6

 

(10.0)

 

6.2

 

(25.0)

 

+100

 

1.5

 

(10.0)

 

4.3

 

(15.0)

 

Static

 

 

 

 

 

 

 

 

 

-100

 

(3.3)

 

(10.0)

 

(13.3)

 

(15.0)

 

 

Our simulation model creates pro forma net interest income scenarios under various interest rate shocks. Given instantaneous and parallel shifts in general market rates of plus 100 basis points, our projected net interest income for the 12 months ending March 31, 2016, would increase slightly at 1.5 percent from model results using current interest rates. Additional disclosures about market risk are included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015, under the heading “Market Risk Sensitivity,” and are incorporated into this Item 3 by reference. There were no material changes in our market risk from December 31, 2015.

 

Item 4. Controls and Procedures.

 

(a) Evaluation of disclosure controls and procedures.

 

At March 31, 2016, the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer (“CEO”) and Interim Principal Financial and Accounting Officer (“IPFAO”) evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based upon that evaluation, the CEO and IPFAO concluded that the disclosure controls and procedures, at March 31, 2016, were effective to provide reasonable assurance that information required to be disclosed in the Company’s reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules

37


 

Table of Contents

Peoples Financial Services Corp.

 

and forms, and to provide reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to the CEO and IPFAO to allow timely decisions regarding required disclosure.

 

(b) Changes in internal control.

 

There were no changes made in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II—OTHER INFORMATION 

 

Item 1. Legal Proceedings.

 

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. In the opinion of management, there were no legal proceedings that had or might have a material effect on the consolidated results of operations, liquidity, or the financial position of the Company during the three-months ended March 31, 2016 and through the date of this quarterly report on Form 10-Q.

 

Item 1A. Risk Factors.  

 

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On January 30, 2015, we announced a stock repurchase program providing for the purchase of up to 370,000 shares of our outstanding common stock, and on February 2, 2016, we announced a stock repurchase program providing for the purchase of up to 225,000 shares of our outstanding common stock.  The timing, price and volume of repurchases under both programs were, and under the 2016 program will be, based on market conditions, relevant securities laws and other factors.

 

The following purchases were made by or on behalf of the Company or any “affiliated purchaser,” as defined in the Exchange Act Rule 10b-18(a)(3), of the Company’s common stock during each of the months for the quarter ended March 31, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

Total Number of

    

Maximum Number

 

 

 

 

 

 

 

 

Shares Purchased

 

of Shares that may

 

 

 

 

 

 

 

 

as Part of Publicly

 

yet be Purchased

 

 

 

Total Number of

 

Average Price

 

Announced

 

Under the

 

Month Ending 

    

Shares Purchased

 

Paid Per Share

    

Programs(1)

    

Programs(1)

 

January 31, 2016

 

6,000

 

$

37.41

 

6,000

 

224,448

 

February 29, 2016

 

2,167

 

 

35.23

 

2,167

 

222,833

 

March 31, 2016

 

3,141

 

$

36.90

 

3,141

 

219,692

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 3. Defaults upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.  

 

None.

 

38


 

Table of Contents

Peoples Financial Services Corp.

 

Item 6. Exhibits.  

 

 

 

10.1

Separation and Release Agreement dated January 5, 2016, by and between Gregory D. Misterman and Peoples Security Bank and Trust Company, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on January 6, 2016.

 

 

31.1

Chief Executive Officer certification pursuant to Rule 13a-14(a)/15d-14(a).

 

 

31.2

Interim Principal Financial and Accounting Officer certification pursuant to Rule 13a-14(a)/15d-14(a).

 

 

32

Chief Executive Officer and Interim Principal Financial and Accounting Officer certifications pursuant to Section 1350.

 

 

101+

Interactive Data File

 


+

As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

 

39


 

Table of Contents

Peoples Financial Services Corp.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto, duly authorized.

 

 

Peoples Financial Services Corp.

 

(Registrant)

 

 

Date: May 6, 2016

/s/ Craig W. Best

 

Craig W. Best

 

President and Chief Executive Officer

 

(Principal Executive Officer)

 

 

Date: May 6, 2016

/s/ John R. Anderson, III

 

John R. Anderson, III

 

Interim Principal Financial and Accounting Officer

 

(Interim Principal Financial Officer and Principal Accounting Officer)

 

 

40


 

Table of Contents

Peoples Financial Services Corp.

 

 

EXHIBIT INDEX

 

Item Number

 

Description

 

Page

 

 

 

 

 

10.1

 

Separation and Release Agreement dated January 5, 2016, by and between Gregory D. Misterman and Peoples Security Bank and Trust Company, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on January 6, 2016.

 

 

 

 

 

 

 

31.1

 

CEO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a).

 

43 

 

 

 

 

 

31.2

 

IPFAO Certification Pursuant to Rule 13a-14 (a) /15d-14 (a).

 

44 

 

 

 

 

 

32

 

CEO and IPFAO Certifications Pursuant to Section 1350.

 

45 

 

 

 

 

 

101

 

The following materials from Peoples Financial Services Corp. Quarterly Report on Form 10-Q for the period ended March 31, 2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

 

 

 

 

41